The Skewed Incentives of Higher Education Spending: Part 1 of 3

By Dr. Laura Williams

October has arrived, and with it, the anxiety of midterm exams. Midterms are designed to help students check in, sometimes to realize they’re in over their heads. Midterms offer a chance to change course -figuratively or literally – or to withdraw. For the hundreds of thousands of American college students attending college on federally subsidized loans, midterms are a moment of truth. It’s midterm exam time for American higher education funding, and we’ll be failing our students yet again.

Libertarians and the liberty-minded can easily dismiss Bernie Sanders’ promise of “free college” as mere theft: the value given to one citizen must first be seized from another citizen. But too often we passively accept conceptions like “financial aid” as valuable, even necessary, crediting federal aid programs with good intentions they consistently fail to realize.

This three part series will examine the midterm crisis of American higher education spending. By examining the skewed incentives set for each actor in the education funding racket, I hope to demonstrate the damage done by progressive programs to those populations they claim to serve.

Basic economics tells us that because people respond to incentives, skewing incentives can cause people and organizations to act in seemingly irrational or anti-social ways. Nowhere is this principle more clearly demonstrated than in the twisted results of federal student aid funding. The stated desire of providing lower-cost, quality education to more students is entirely undermined by the perverse incentives put into place by the administration of good intentions through force.

As usual, government interference shifts the incentives of even the best of intentions. Colleges may raise prices (tuition) with impunity, confident that nearly all students qualify for some kind of aid or loan, and are thus insulated from the price of the product. Unfortunately students are also ill-equipped to determine the value of the product, as the intrinsic value of a college education is both near-impossible to quantify. What measurable outcomes we do have (completion rates and post-graduation salaries) are not encouraging.

Federal funding for college does not subsidize the cost of education. Nor is it an investment in the post-college success. What federal student aid subsidizes is the indentured servitude of our most vulnerable workers. Each member of the class of 2015 graduated into near-record unemployment for college graduates, and with an average of $40,000 in debt, most of it government-sponsored. Newly minted college graduates (who have been promised since kindergarten that college was a necessary and sufficient condition for a middle-class life) now face stagnated wages, saturated labor markets, and staggering student loan payments. For the right to earn a living in America, they will pay government a third of their wages, plus an additional ten percent in loan repayment on the debt they were told was essential to their success.

Troublingly often, we hear these spiraling cycles of soaring debts blamed on market forces, as though colleges were operating as robber barons, driving up prices on a helpless, captive population. Because government has so long framed college as a necessity for everyone, the capstone of a quality education and the price of entry for the American dream, its value is assumed, rather than measured. Prospective students and their parents have precious little information about the value added by any particular institution. Sure, kids who go to Harvard and Yale often do brilliantly, but attending Harvard or Yale is an indicator that they were on track to do well with or without that particular institution’s product. Because the traditional college education spans some of the most emotionally and psychosocially transformative years of any life (18-22) the change is difficult to attribute to an isolated cause. We know very little about what specific aspects of college life – student societies, faculty, mentorship, internships, facilities, activities – set students up for success. Because we find it difficult to quantify the value of an education, we tend to spend it on the elaborately visible and marketable, rather than the more difficult to quantify, but genuinely enriching parts of the college experience.

The next article in this series will examine the incentives faced by institutions to spend – or not spend – tuition and tax dollars on certain aspects of a college education.